The unintended consequences of the TALF and quantitative easing are glaring in the CMBS credit default swap markets. Both the TALF and the Federal Reserves purchases of assets were conceived to thaw the securitization markets by purchasing AAA rated securities. However, since there is no other market than the one made by the government, a huge gap between AAA and lower rated tranches has emerged.
The net result is any security rated below AAA is now de facto “toxic”. The charts below are from Markit and illustrate the spreads on the CMBX indices. The CMBX index is an index of credit default swaps on CMBS (Commercial Mortgage Backed Securities).
Click to enlarge:
The AAA CMBX Index has fallen since the TALF announcement, while the BBB has remained at all time highs. The risk spread between the two tranches has never been higher. While the Federal Reserve and Treasury have had the best of intentions what they have actually done is create a whole new batch of toxic assets.